BMW’s $38.4 Million Tax Refund Claim

 

I had a partner who would likely snap if you mentioned a superseding tax return.

We had one go south. We electronically filed an individual tax return before April 15^th. We then learned that the return had omitted a significant transaction. Many tax practitioners would file an amended return after April 15 and square up with the IRS at that time. Since there was still time before April 15 and the dollars were enough to draw a significant penalty – and I have a big mouth – we decided to file a superseding return instead.

It did not go well. The IRS got surprised with the superseding, as it received a second return which was not marked “amended.” The IRS was paralyzed and assumed a filing mistake. The taxpayer had sent a check, which the IRS of course refunded. We had the client void and return the check, as taxes were due when the dust eventually settled. We could not resolve the matter administratively and wound up in Appeals. The issue was eventually resolved, but at needless time and cost – and a practitioner who may have forsworn superseding returns for the remainder of his career.

I am now looking at a case involving a $38.4 million tax refund and a superseding return.

With the above story as background, let’s start.

The case involves BMW US, itself a subsidiary of BMW AG (the German parent).

• The 2019 BMW US return was due April 15, 2020 and extended to October 15, 2020.

• BMW US filed its 2019 corporate (Form 1120) tax return on September 15, 2020.

• On October 14, 2020, BMW US filed a 2019 superseding Form 1120.

• On October 13, 2023 BMW US filed an amended 2019 return requesting a refund of $38,436,000.

COMMENT:  A C corporation return (such as the BMW US Form 1120) is initially due 3 and ½ months after year-end. For a calendar year-end return, that initial due date would be April 15. An extension is available for six months, making the extended due date October 15. A superseding return – by definition – must be filed on or before the due date (original or extended) of the return. We can see what BMW US was doing: it filed a 2019 superseding return on October 14, 2020 – one day before the extended due date. Had BMW US filed on October 16, it would have needed to file an amended return, as it would have been one day too late to file a superseding.

Let’s talk about superseding returns in general. To be fair, you can have a long and prosperous tax career and never file a superseding. Like so much of tax practice, it depends on your clients and what they get themselves into.

Think of a superseding return as a do-over. There is something on the initially-filed return that you want to change, and an amended return will not work (or work as well). There are elections, for example, that cannot be made on an amended return. A BBA partnership comes to mind. One does not amend a BBA partnership (unless one is able to elect out) the same way as other tax returns. There instead are special procedures - called the administrative adjustment request (AAR) process - which require IRS permission and which you must follow. I elect out of BBA for my partnerships whenever possible, as the AAR process is a pain.

The superseding - while its requirements are strict – steps into and takes the place of the initially-filed return.

Tax returns fall into three categories:

• Initial returns

• Superseding returns

• Amended returns

Initial and superseding returns filed before April 15 are deemed filed on April 15. The statute of limitations period begins on April 15.

Returns filed after April 15 but within a valid extension period are treated as filed on the date received by the IRS. The statute of limitations period begins on the date received.

Amended returns received after the valid extension period must be received within the statute of limitations period.

What happened to prompt BMW US to file a superseding?

On September 21, 2020 the IRS issued new Regulations addressing changes to depreciation under Section 168. More specifically, the changes were taxpayer-friendly, and BMW US wanted the new depreciation expense.

The Court found itself facing a new issue: when does the statute of limitations for refunds start when both initial and superseding returns are timely filed within an extension period?

The BMW US case went before the U.S. Federal Court of Claims.

The IRS position was straightforward:

• The initial 2019 return was due April 15, 2020.

• The 2019 return was extended to October 15, 2020.

• The return was filed on September 15, 2020. This is the initial return and begins the Section 6511 statute of limitations period for refunds.

• A superseding return was filed on October 14, 2020.        

• An amended return was filed October 13, 2023. This filing was outside the statute of limitations period, which started September 15, 2020 and expired September 15, 2023.

Code § 6511 - Limitations on credit or refund

(a) Period of limitation on filing claim

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

(b) Limitation on allowance of credits and refunds

(1) Filing of claim within prescribed period

No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

The IRS cited two Supreme Court decisions on its side: Zellerbach and National Paper Products. Those decisions however involved Section 6501, which is the statute of limitations for IRS assessment.

Code § 6501 - Limitations on assessment and collection

              (a) General rule

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

The Supreme Court reasoned that a second return acts as an amendment or supplement to the initially-filed return. What it did not do is toll a limitation (referring to Section 6501) which has already begun to run.

BMW US fired back:

• This is not a case involving Section 6501 (the statute of limitations for the IRS to assess tax). Rather it is a case involving Section 6511 (the statute of limitations for the IRS to issue refunds).

• That being so, reliance on Zellerbach and National Paper Products is misplaced.

• The court should rely instead on Haggar, which dates back to the era of excess-profit tax. Capital stock was included in the calculation of excess profit, and once that value was declared it could not be changed. Whether a superseding took the place of an initially-filed would have meant something. 

• In Haggar the taxpayer whiffed on the calculation of capital stock. Before the due date it filed a superseding return. The IRS refused to accept it. The case went to the Supreme Court, which reasoned with the concept of a “first return.” It decided that the superseding was a first return, and Haggar won its case.

• Relying on Haggar, the Section 6511 limitations period began on October 14, 2020, when the superseding return - that is, the “first return” - was filed.

• This would make the amended return (October 13, 2023) timely filed. 

The Court observed:

The parties have found no directly analogous precedent for determining the operative trigger to start the statute of limitations when the IRS provided a taxpayer with an extension, and both the initial and superseding returns are filed before that extended deadline.”

I agree. I do not remember ever seeing this fact pattern in my career.

The Court philosophized: there can only be one “initial” return.

The Court reasoned that both Zellerbach, National Paper Products, and Haggar could be read together without inconsistency. Haggar addressed the substance of the return, its elections and disclosures.  Zellerbach and National Paper Products instead addressed the Section 6501 statute of limitations. They were addressing different issues, so the decisions do not contradict.

BMW US noted that Zellerbach and National Paper Products were Section 6501 cases. This was not a Section 6501 case. It was instead a Section 6511 case. The two Sections could – depending on their drafting - yield different results, as the use of Section 6501 reasoning might not apply to a Section 6511 case.  

The Court was concerned that BMW US’ argument would whipsaw the IRS. A taxpayer could reset the three-year period for a refund under Section 6511 by timely filing a superseding return, whereas the IRS would have to use the initially-filed return for the three-year assessment period under Section 6501.

COMMENT: True, but if that is how Congress drafted it then Congress would have to change the law.

The Court decided that it would apply Zellerbach and National Paper Products to Section 6511, making BMW US’ $38.4 million refund request untimely. Except …

… there is another case in the works that might affect this decision.

It is the Kwong case. It comes out of the COVID era, when the IRS postponed numerous filing and payment deadlines.

These postponements are called “tolling” in tax jargon. Let’s say that you have 12 months to file something, but for whatever reason there is a toll of three months. You now have 15 months to file that something.

The Court called intermission on BMW US pending Kwong.

BMW US may yet have game.

Our case this time was BMW (US) Holding Corporation and Subsidiaries v United States, US Court of Federal Claims, No. 1:25-cv-01984.

Can Your Tax Preparer Expose You To Fraud?

We have talked about the statute of limitations many times.

In general, the IRS has three years to challenge your tax return and assess additional taxes. Reverse the direction and you likewise have three years to request refund of a tax overpayment.

The intent is clear: at some point the back and forth must stop.

Mind you, if the IRS assesses additional tax within that period, then the three-year statute for assessment transmutes to a ten-year statute for collection.

There are exceptions to the three years, of course. Here are some exceptions from Section 6501(c):

Let’s do a little tax practice today. Reread (c)(1) above. I have a question for you:

          Must the intent to evade tax be the taxpayer’s?

On first impression, the answer appears to be “yes.” Who - other than the taxpayer - stands to benefit from filing a false or fraudulent return?

Let’s talk about Stephanie Murrin.

For years 1993 to 1999 the Murrins used a tax preparer for their joint individual income tax return, as well as two partnerships in which Ms. Murrin was a general partner. Unbeknownst to the Murrins, the preparer placed false or fraudulent information on those returns with the intent to evade tax.

Why? We are not told.

The Murrins were not aware of the preparer’s actions, nor did they intend to evade tax.

The IRS (somehow) caught up to this and in 2019 (twenty years later) issued a statutory of deficiency for the years at issue. The IRS argued that the years were still open under the statute of limitations pursuant to Section 6501(c).

Mr. Murrin died before the case went to Tax Court.

Mrs. Murrin ran into a formidable obstacle: stare decisis.

The Tax Court had previously decided (in Allen) that Section 6501(c) did not look solely at the taxpayer to find intent.

Mrs. Murrin argued that Allen was wrongly decided. She based her argument on a Federal Circuit Court decision (BASR) disagreeing with the Tax Court decision in Allen.

She had an argument.

The Tax Court noted that each judge in BASR wrote separately, meaning that it was unclear which interpretation of Section 6501(c) prevailed. When everyone has an opinion, there is no standard for precedence.

With that backdrop, the Tax Court stated:

The Federal Circuit’s position on the precise point before us is not clear. We further note that ‘there is no jurisdiction for appeal of any decision of the Tax Court to the [Federal Circuit]’ in any event. Stare decisis principles thus would seem to weigh against our reconsideration of our precedent in light of BASR.”

The Tax Court had two arguments to support its position:

• By its own terms, this provision does not restrict its application to cases where taxpayers personally had intent to evade tax. Instead, Congress showed itself agnostic as to who had to have the intent to evade tax, choosing to ‘key [the extension of the limitation period] to the fraudulent nature of the return’ rather than tie it to taxpayer intent.”

• There are other Code sections (which we will skip for our discussion) where Congress explicitly limited required intent to the taxpayer. The fact that it did not do so here is a tell that Congress did not mean to limit the meaning of “intent” for purposes of this Section.

Mrs. Murrin lost before the Tax Court.

She appealed to the Third Circuit, and I read last week that she lost there also.

Is it fair? My first reaction is no, as taxpayer is the tax return and vice versa. Who else can have a closer connection to that return that the person filing it? It seems to me that the judicial wordsmithing here is drivel and prattle. Still, I acknowledge the necessity and persuasion of stare decisis, although poor drafting of tax law and stare decisis is a bad brew for common sense.

Our case this time was Murrin v Commissioner, No 23-1234 (3^rd Cir, August 18, 2025).